tag:blogger.com,1999:blog-39901479897426828102018-05-24T03:40:05.490-04:00Working to RetirementSimple thoughts on investing from HORAN Capital AdvisorsDavid Templeton, CFAhttp://www.blogger.com/profile/08782216535717865701noreply@blogger.comBlogger173125tag:blogger.com,1999:blog-3990147989742682810.post-60170625195969290552017-11-30T11:42:00.000-05:002017-11-30T11:42:15.520-05:00Why I Will Not Buy Bitcoin (and why that may cost me)Yesterday the price of Bitcoin surpassed $11,000.&nbsp; Two days ago, it surpassed $10,000.&nbsp; It keeps going up...and I keep refusing to buy.<br /><br /><a name='more'></a>Here is a chart of Bitcoin's price since the summer of 2010.<br /><br /><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody><tr><td style="text-align: center;"><a href="https://4.bp.blogspot.com/-cfF0FUGQbRo/Wh7cx8VIuLI/AAAAAAAAAeU/CufvPjMEvbEfQlkGfNdIa28tUR2nDORpQCLcBGAs/s1600/BTC%2B2017%2B11%2B29.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="354" data-original-width="882" height="160" src="https://4.bp.blogspot.com/-cfF0FUGQbRo/Wh7cx8VIuLI/AAAAAAAAAeU/CufvPjMEvbEfQlkGfNdIa28tUR2nDORpQCLcBGAs/s400/BTC%2B2017%2B11%2B29.PNG" width="400" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;"><a href="https://www.coindesk.com/price/" target="_blank">Coindesk</a></td></tr></tbody></table>It has gone up a lot, but a majority of the gains have come only recently.&nbsp; In fact, just since we mentioned Bitcoin in our <a href="http://www.horancapitaladvisors.com/Portals/horancapitaladvisors/Documents/Commentary/Q2%202017%20Investor%20Letter.pdf" target="_blank">Q2 2017 Investor Letter</a>, it is up around 340%.<br /><div><br /></div><div>So what is Bitcoin and why are (some) people so excited about it?</div><div><br /></div><div>While I won't pretend to understand the intricacies of the system, I feel I can generalize enough for these purposes (and that if I am wrong, some Bitcoin fan will find me on Twitter and happily correct my many mistakes).&nbsp; The appeal of Bitcoin is the innovative blockchain.&nbsp; All of our financial systems rely on trusted intermediaries to facilitate transactions.&nbsp; The Federal Reserve controls the money supply, investment banks help buy and sell securities, Paypal enables secure payment on the internet, etc.&nbsp; None of these are possible unless market participants have this trusted intermediary.&nbsp; The blockchain makes all of these possible without any intermediary.</div><div><br /></div><div>The blockchain allows for secure transactions amongst untrustworthy counterparties by having transactions validated by the participants (miners) themselves rather than by an outside party.&nbsp; This decentralized security is the entire appeal of the blockchain in a nutshell.</div><div><br /></div><div>Bitcoin itself is the "currency" that people use to transact on the Bitcoin blockchain.&nbsp; So what makes it valuable?</div><div><br /></div><div>There are two schools of thought to this (both relying on the fact that only 21 million bitcoins will ever be created):</div><div><ol><li>The blockchain changes the entire financial world and everyone uses Bitcoin for regular commerce.&nbsp; It becomes globally dominant currency.&nbsp;&nbsp;</li><li>The secure and decentralized nature of Bitcoin allows it to function as a store of value like gold.&nbsp; Bitcoin will win out vs. other cryptocurrencies because it was the first mover in the space and is the most popular platform, and younger generations will be more drawn to the online Bitcoin vs. the physical gold.&nbsp; Thomas Lee recently took this approach to get a $25,000 price target for Bitcoin (<a href="https://www.youtube.com/watch?v=J-Vjgx75GXQ&amp;feature=youtu.be" target="_blank">Youtube</a>).</li></ol><div>So, why haven't I bought?&nbsp;</div></div><div><br /></div><div>Simply, I don't believe either of the two above scenarios will come to fruition.&nbsp; Before elaborating, I should caution that I may very well be wrong, and that I have been wrong for the past thousands of percentage points of gains, but I think explaining my current belief is productive regardless.</div><div><ol><li>Scenario 1 appears to me to be overly optimistic for a few reasons.&nbsp; Governments will likely be very wary of ceding monetary policy to Bitcoin and will seek to curtail its usage (China has seen some cryptocurrency crackdown thus far (<a href="https://www.cnbc.com/2017/11/16/chinas-bitcoin-crackdown-has-helped-japan-embrace-the-crypto-movement.html" target="_blank">CNBC</a>, <a href="https://www.forbes.com/sites/leonhardweese/2017/11/29/bitcoin-regulation-in-china-still-unclear-but-chinese-exchanges-thrive-overseas/#20bae9c36487" target="_blank">Forbes</a>)).&nbsp; Bitcoin's maximum transaction volume remains far too low for viability as a currency and repeated "splits" in an attempt to resolve this issue will cause users to lose confidence in the system (<a href="http://www.altcointoday.com/bitcoin-ethereum-vs-visa-paypal-transactions-per-second/" target="_blank">altcointoday</a>).&nbsp; The high energy requirements for Bitcoin mining appear unsustainable at scale (<a href="https://www.cbsnews.com/news/bitcoin-mining-energy-consumption/" target="_blank">CBS</a>).</li><ol><li>I tend to believe that if this scenario comes true, it will be for a currency other than Bitcoin.&nbsp; The tech bubble provides a great example for technology/ideas that were ultimately very successful, but only after the failure of the "first movers" (<a href="https://www.wired.com/2014/12/da-bom/" target="_blank">Wired</a>).&nbsp; I suspect the same could be true for Blockchain/Bitcoin after early excitement dies down.</li></ol><li>Scenario 2 seems more plausible, but ignores the important history of gold.&nbsp; Gold is a unique asset due to its historical use as/ties to currency.&nbsp; This history makes gold a safe haven asset in times of market distress - fleeing to familiarity in a way.&nbsp; Bitcoin, lacking the same monetary history, will struggle to forge an identity as a safe haven asset.&nbsp; Gold, admittedly, went through similar periods of volatility (namely after the end of the gold-standard), but ultimately investors fell back on its history.&nbsp; Lacking this same historical identity/precedent, I do not see how Bitcoin can transform into a similar "safe" investment.</li></ol><div>My crystal ball isn't any clearer than the thousands of other people commenting on Bitcoin nowadays, so take my opinions with a grain of salt.&nbsp; Cryptocurrencies remain a fascinating recent financial development (and cultural movement in a way), but one that I will not be participating in for the time being.&nbsp;<br /><br />To give perspective on just how wrong I have been on Bitcoin thus far when compared to other historic bull markets...</div></div><div><table cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody><tr><td style="text-align: center;"><a href="https://4.bp.blogspot.com/-CQljUf03O4M/WiAya1zZOCI/AAAAAAAAAes/UMvj-G_Nx4YvBzQmMjICElzo0uxxUtmbwCLcBGAs/s1600/BTC%2Bvs.%2BBubbles.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="618" data-original-width="575" src="https://4.bp.blogspot.com/-CQljUf03O4M/WiAya1zZOCI/AAAAAAAAAes/UMvj-G_Nx4YvBzQmMjICElzo0uxxUtmbwCLcBGAs/s1600/BTC%2Bvs.%2BBubbles.png" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;"><a href="https://twitter.com/srussolillo/status/936059459448664066" target="_blank">Steven Russolillo</a></td></tr></tbody></table><br />All of the above thoughts are a more long-term analysis on the future of Bitcoin.&nbsp; Near term there appear to be a few catalysts on the horizon including the introduction of Bitcoin Futures by CME group.&nbsp; This, and other factors, may continue to introduce a broader demand base for Bitcoin and at the end of the day, finance is all about supply and demand.<br /><br /><br /></div>Matt Woebkenberghttp://www.blogger.com/profile/02339985889844055427noreply@blogger.com0tag:blogger.com,1999:blog-3990147989742682810.post-77258285884456799772017-11-20T17:03:00.000-05:002017-11-20T20:33:01.078-05:00Why aren't we paid more?I promise that this is a valid post and not the inappropriately located early rumblings of a labor strike...and now that I have alleviated the concerns of my bosses who may or may not read this blog, we can carry on...<br /><br />My colleague recently wrote a post on his blog entitled "<a href="http://disciplinedinvesting.blogspot.com/2017/11/nfib-small-business-optimism-index.html" target="_blank">NFIB Small Business Optimism Index Highlights Tight Labor Market</a>".&nbsp; One of the big takeaways from the NFIB report was that, "Fifty-nine percent of owners said they tried to hire in October, with 88 percent of them reporting no or few qualified applicants."&nbsp; <br /><a name='more'></a><br />A tight labor market (difficulty hiring) is generally a good sign for the economy as increased competition for qualified workers drives up wages.&nbsp; Unfortunately, in this case, wages just haven't increased as shown by the chart below.<br /><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://1.bp.blogspot.com/-peoGijqXUOs/WhNGbRVkrbI/AAAAAAAAAd8/Z1r2W92avHkHRHW6UVw-Lkva8uiMJSiMwCLcBGAs/s1600/Wage%2BInflation%2B%2526%2BNFIB%2BHard%2Bto%2Bfill.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="390" data-original-width="521" src="https://1.bp.blogspot.com/-peoGijqXUOs/WhNGbRVkrbI/AAAAAAAAAd8/Z1r2W92avHkHRHW6UVw-Lkva8uiMJSiMwCLcBGAs/s1600/Wage%2BInflation%2B%2526%2BNFIB%2BHard%2Bto%2Bfill.PNG" /></a></div><br />Jobs are becoming harder to fill, but wages are growing at a relatively meager pace (slightly above inflation).&nbsp; Typically we would expect to see faster wage growth as more firms compete for limited talent.&nbsp; This wage growth would then, ideally, increase consumer spending and accelerate economic growth.Matt Woebkenberghttp://www.blogger.com/profile/02339985889844055427noreply@blogger.com2tag:blogger.com,1999:blog-3990147989742682810.post-35043957878873954422017-11-18T10:30:00.000-05:002017-11-18T10:30:07.235-05:00Hard to Lose MoneyFor U.S. investors it has been almost difficult to lose money thus far in 2017.&nbsp; The below chart shows that most global equities and sovereign 10yr bonds are in positive territory in US dollar terms for the year.<br /><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://4.bp.blogspot.com/-wJSNA7TWYtw/Wg3l2KksUQI/AAAAAAAAAdk/6Eswu_H0STM3QwCf_KR_jeLO-Ezco8exwCLcBGAs/s1600/USD%2BGlobal%2BReturns%2B2017%2B11%2B16.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="448" data-original-width="594" src="https://4.bp.blogspot.com/-wJSNA7TWYtw/Wg3l2KksUQI/AAAAAAAAAdk/6Eswu_H0STM3QwCf_KR_jeLO-Ezco8exwCLcBGAs/s1600/USD%2BGlobal%2BReturns%2B2017%2B11%2B16.PNG" /></a></div><br />Things will not always be so rosy, so let's enjoy it while it is.Matt Woebkenberghttp://www.blogger.com/profile/02339985889844055427noreply@blogger.com0tag:blogger.com,1999:blog-3990147989742682810.post-76615263069799160492017-11-16T13:56:00.000-05:002017-11-16T13:56:26.906-05:00Where to Invest?Below is a cool chart showing the current 12 month forward P/E ratio for stocks by country.&nbsp; That is, how expensive are stocks in relation to what they are expected to earn over the next 12 months?<br /><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://4.bp.blogspot.com/-zYYtfF_C_WA/Wg3A7BuPwoI/AAAAAAAAAdM/2FJ32XqkDWIaC0VwOLmEUZHdA6Rgut2zgCLcBGAs/s1600/Equity%2BValuation%2Bby%2BCountry.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="487" data-original-width="525" src="https://4.bp.blogspot.com/-zYYtfF_C_WA/Wg3A7BuPwoI/AAAAAAAAAdM/2FJ32XqkDWIaC0VwOLmEUZHdA6Rgut2zgCLcBGAs/s1600/Equity%2BValuation%2Bby%2BCountry.PNG" /></a></div><br /><a name='more'></a>What are the takeaways?<br /><br /><ul><li>Almost everything is expensive - current P/E &gt; 10 year average</li><li>The U.S. equity markets are about as expensive as India's while U.S. GDP growth is 1-2% and India's is 7-8%</li><ul><li>More developed economies (the U.S.) tend to be more valuable than less developed economies (India)</li><li>There is also much debate over how relevant GDP growth is to investment returns</li></ul><li>Countries like Russia look cheap relative to other countries, but still relatively expensive compared to recent (10 year) history</li></ul>Matt Woebkenberghttp://www.blogger.com/profile/02339985889844055427noreply@blogger.com0tag:blogger.com,1999:blog-3990147989742682810.post-21977342928307072862017-11-11T11:49:00.000-05:002017-11-11T11:50:15.114-05:00Wealthy vs. WEALTHYWhy are you investing?&nbsp; What's the goal?&nbsp; What are you willing to give up to reach that goal?&nbsp; A lot of the "advice" on this blog (and many other financial blogs) assumes that you want to retire at some point and that you are willing to give up a certain percentage of current consumption in order to save for that goal.&nbsp;<br /><div><br /></div><div>Unfortunately, what most investors seem to be looking for is a "hot tip" with unlimited upside so that they can get incredibly wealthy in a relatively short period of time. Obviously, the "advice" has to be different to reach this goal.&nbsp; Well, I'm here to provide that "advice" (mostly by borrowing it from a better blog).</div><div><a name='more'></a><br /></div><div><a href="http://longorshortcapital.com/" target="_blank">Long or Short Capital</a>, a very funny financial blog (yes these exist...or at least one does), provides a simple outline to becoming a billionaire in their "<a href="http://longorshortcapital.com/four-simple-steps-to-becoming-a-billionaire.htm" target="_blank">Four Simple Steps to Becoming a Billionaire</a>" reproduced below.</div><div><br /></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody><tr><td style="text-align: center;"><a href="https://1.bp.blogspot.com/-Mqv_EKJ2vbY/WgcjIK7po-I/AAAAAAAAAcw/M0bGqR8xouIqyCNl30UPZjOAly-pNxw3QCLcBGAs/s1600/Becoming%2Ba%2BBillionaire.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="497" data-original-width="487" src="https://1.bp.blogspot.com/-Mqv_EKJ2vbY/WgcjIK7po-I/AAAAAAAAAcw/M0bGqR8xouIqyCNl30UPZjOAly-pNxw3QCLcBGAs/s1600/Becoming%2Ba%2BBillionaire.PNG" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;"><a href="http://longorshortcapital.com/four-simple-steps-to-becoming-a-billionaire.htm" target="_blank">Long or Short Capital</a></td></tr></tbody></table><div>This is funny, and very true.&nbsp; You only become WEALTHY by taking irrational risks.&nbsp;&nbsp;</div><div><br /></div><div>Jeff Bezos ignored countless risks in carrying out his vision at Amazon and he was one of the few to survive the tech bubble and thrive since.&nbsp;&nbsp;</div><div><br /></div><div>Elon Musk made a bunch of money from the sale of Paypal to eBay and then turned around and invested all of it into SpaceX, Solar City, and Tesla.&nbsp; When he could have retired with hundreds of millions, he instead dumped all of it into 3 brand new start-ups with highly unlikely chances of success - no advisor would ever recommend that...and he is now worth billions.&nbsp;&nbsp;</div><div><br /></div><div>Warren Buffett makes concentrated bets in individual stocks while simultaneously telling others to own index funds and stay diversified.&nbsp; The risks that he takes are irrational for almost all other people.</div><div><br /></div><div>Hedge fund managers everywhere take on enormous leverage in an effort to produce outsized returns.&nbsp; Most fail.&nbsp; The few that succeed are handsomely rewarded (<a href="http://www.businessinsider.com/richest-hedge-fund-managers-in-the-world-2015-1" target="_blank">Wealthiest Hedge Fund Managers 2015</a>).</div><div><br /></div><div>These are the few success stories.&nbsp; We do not hear about the many others who have pursued similar routes and lost everything they own when they fail.&nbsp; You simply do not become enormously WEALTHY without taking irrational risks (entrepreneurship, concentrated investing, leverage, etc.).&nbsp; You do not become WEALTHY without being willing to lose it all.&nbsp;&nbsp;</div><div><br /></div><div>Our clients, and presumably most of our readers, are not willing to lose it all (nor should they be).&nbsp; But it is important that this is understood.&nbsp; Once an investor accepts that his/her goal is not to "get rich quick", it becomes much easier to tolerate market volatility and to maintain a diversified portfolio.&nbsp; If you are aiming for Wealthy, rather than WEALTHY, then you need diversified market exposure for the long term, not a "hot-tip" from your investing "guru".</div>Matt Woebkenberghttp://www.blogger.com/profile/02339985889844055427noreply@blogger.com0tag:blogger.com,1999:blog-3990147989742682810.post-36082741796785216612017-11-02T14:21:00.000-04:002017-11-02T14:56:56.779-04:00With Age Comes WisdomThe results of the Schroders Global Investment Study 2017 have recently been released.&nbsp; The study surveyed 22,100 people from around the globe to find out what they expected as a return on their investments over the next five years (<a href="http://www.schroders.com/en/insights/global-investor-study/investors-expect-returns-of-10.2-with-millennials-hoping-for-more" target="_blank">Schroders</a>).&nbsp; Apparently investors expect a 10.2% annualized return over that time period.<br /><br /><a name='more'></a><br /><br />The breakdown by generation is: <span style="font-family: inherit;">"<span style="background-color: white;">Millennials (born 1982-1999, aged 18-35): 11.7% Generation X (born 1965-1981, aged 36-52): 9.8% Baby Boomers (born 1945-1964, aged 53-72): 8.6% Silent Generation (born 1923-1944, aged 73+): 8.1%"</span></span><br /><span style="font-family: inherit;"><span style="background-color: white;"><br /></span></span><span style="background-color: white;"><span style="font-family: inherit;">So older people are more pessimistic.&nbsp; Young people are optimistic.&nbsp; Fine.</span></span><br /><span style="background-color: white;"><span style="font-family: inherit;"><br /></span></span><span style="background-color: white;"><span style="font-family: inherit;">Finance media, however, has had a wonderful time with this report because return expectations are so high despite presently high valuations.&nbsp; Based on the idea of mean reversion, high valuations simply mean that we have "borrowed" investment returns from the future.&nbsp; The valuation will revert to the average either through stagnant prices while earnings grow or through a fall in stock prices.&nbsp; This is probably generally true, but it doesn't really matter in this case for two reasons: 1. 5 years is not a long enough time frame to expect mean reversion and 2. the note on risk aversion is much more important.</span></span><br /><span style="background-color: white;"><span style="font-family: inherit;"><br /></span></span><span style="background-color: white;"><span style="font-family: inherit;">1. Pundits claim that future return expectations are lower due to presently high valuations.&nbsp; This is most likely true barring a "regime change" that justifies higher valuations for the long term.&nbsp; This does not, however, necessarily mean that returns will be any lower over the next five years.&nbsp; Five years is a relatively short time period in investing, and valuations can certainly stay elevated for that long.&nbsp; With 2018 estimated earnings growth for the S&amp;P 500 at 11.2% and the historical return of the S&amp;P 500 somewhere around 10%, 10.2% is not entirely unrealistic for equities.&nbsp; It may be unrealistic over a 20-30 year horizon, but far more unusual things have happened in only 5 years.</span></span><br /><span style="background-color: white;"><span style="font-family: inherit;"><br /></span></span><span style="background-color: white;"><span style="font-family: inherit;">2. While the return expectation may not be completely unreasonable for the equity markets, it is incredibly optimistic for a total balanced portfolio.&nbsp; It is especially optimistic given that 59% of the surveyed investors said that they did not want to take on as much risk in their investments now as they have in years past.&nbsp; Risk and return are necessarily related in finance, and having optimistic return expectations while decreasing risk is a holy grail that simply does not exist.</span></span><br /><span style="background-color: white;"><span style="font-family: inherit;"><br /></span></span><span style="background-color: white;"><span style="font-family: inherit;">In conclusion, I don't know any better than you or the people polled what investment returns will be for the next five years.&nbsp; What I do know is that:</span></span><br /><span style="background-color: white;"><span style="font-family: inherit;"><br /></span></span><span style="background-color: white;"><span style="font-family: inherit;">Five years is a very short window in investing.&nbsp; Short enough that "reversion to the mean" is not a useful forecasting strategy.</span></span><br /><span style="background-color: white;"><span style="font-family: inherit;"><br /></span></span><span style="background-color: white;"><span style="font-family: inherit;">Risk and return are, and always will be, related.&nbsp; Every investor is looking for less risk and higher returns, but this does not exist.&nbsp;</span></span>Matt Woebkenberghttp://www.blogger.com/profile/02339985889844055427noreply@blogger.com0tag:blogger.com,1999:blog-3990147989742682810.post-57555054408001319532017-10-23T16:14:00.000-04:002017-10-23T16:14:43.385-04:00We've Reached the PeakWhile I generally refrain from sharing opinions on this blog, sometimes I must make an exception.&nbsp; The S&amp;P 500 will undoubtedly reach its cyclical peak on November 1, 2017.&nbsp; How can I be so confident you ask?&nbsp; Simple.&nbsp; The bagel is back.<br /><br /><a name='more'></a><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://2.bp.blogspot.com/-tVG1AlSIjTM/We5JB91W0GI/AAAAAAAAAcI/bWl7natJdBUkmBoqlPo5vr6IbaOpQZNMgCLcBGAs/s1600/Bagel%2BPeak.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="340" data-original-width="522" src="https://2.bp.blogspot.com/-tVG1AlSIjTM/We5JB91W0GI/AAAAAAAAAcI/bWl7natJdBUkmBoqlPo5vr6IbaOpQZNMgCLcBGAs/s1600/Bagel%2BPeak.PNG" /></a></div><br />The Westin New York at Times Square is once again offering a $1,000 bagel (<a href="http://www.marketwatch.com/story/a-1000-bagel-the-westin-new-york-might-have-just-doomed-this-bull-market-2017-10-23?mod=markets_twitter_new&amp;link=sfmw_tw" target="_blank">Marketwatch</a>).&nbsp; The original offering of this bagel in the summer of 2007 marked the peak of the market before the Great Recession...it is one-for-one on recession predictions (and that is a better track record than 99.9% of investors...probably...though that is a made up statistic).<br /><br />So, why is this such a good recession indicator?&nbsp; Simple answer - it's not.&nbsp; Do not make investing decisions off of one indicator alone and certainly not if that indicator is bagel-related.&nbsp; I bring this up because one very popular recession indicator is growing increasingly "worrisome".&nbsp; The yield of the 10 Yr Treasury minus the yield of the 2 Yr Treasury has reliably foreshadowed the last three recessions as shown by the below chart.<br /><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://4.bp.blogspot.com/-L2T_4pHXnhw/We5LSlWDBjI/AAAAAAAAAcU/VFf4mNxNf1EvcnKnqmVDdu1iQANZjMkzQCLcBGAs/s1600/10_2%2BTreasury%2BSpread.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="409" data-original-width="543" src="https://4.bp.blogspot.com/-L2T_4pHXnhw/We5LSlWDBjI/AAAAAAAAAcU/VFf4mNxNf1EvcnKnqmVDdu1iQANZjMkzQCLcBGAs/s1600/10_2%2BTreasury%2BSpread.PNG" /></a></div><br />When this spread has gone negative, recession has followed.&nbsp; This indicator has received increasing attention as the spread has once again dipped below 1% (100bps).&nbsp; Importantly, even if this spread becomes negative, a recession is not necessarily imminent.&nbsp; The reliable recent history certainly makes it worth paying attention to, but it is just as irrational to trade on this one indicator as it is to trade on the bagel indicator.<br /><br />[For absolute clarity: The market probably will not peak on 11/1/2017, but if it does then I will delete this disclaimer and act like I called it.]Matt Woebkenberghttp://www.blogger.com/profile/02339985889844055427noreply@blogger.com0tag:blogger.com,1999:blog-3990147989742682810.post-36485772849727301832017-10-19T09:57:00.000-04:002017-10-19T09:58:49.984-04:001987 Market Crash - 30 Years Ago Today"On October 19, 1987 the Dow Jones Industrial average lost 22.6 percent of its value in a single day, a percentage drop twice as much as any single day in the 1929 stock market crash." (<a href="https://money.usnews.com/investing/buy-and-hold-strategy/articles/2017-10-12/30-years-ago-lessons-from-the-1987-stock-market-crash" target="_blank">US News</a>).&nbsp; In light of this historic day in markets, many market participants are sharing their memories of that day.&nbsp; I wish I could do the same for you, but I was not born for a few more years...so instead let's look at some pictures of how scary it was.<br /><br /><a name='more'></a><br />This guy is sad<br /><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody><tr><td style="text-align: center;"><a href="https://2.bp.blogspot.com/-QuEFdFwq5tg/WeioU-SELjI/AAAAAAAAAbc/ZPSYzX6D8VkPstI2h4s6SVWwshL99gzQwCLcBGAs/s1600/1987%2B1.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="647" data-original-width="970" height="213" src="https://2.bp.blogspot.com/-QuEFdFwq5tg/WeioU-SELjI/AAAAAAAAAbc/ZPSYzX6D8VkPstI2h4s6SVWwshL99gzQwCLcBGAs/s320/1987%2B1.jpg" width="320" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;"><a href="https://money.usnews.com/investing/buy-and-hold-strategy/articles/2017-10-12/30-years-ago-lessons-from-the-1987-stock-market-crash" target="_blank">US News</a></td></tr></tbody></table><div class="separator" style="clear: both; text-align: left;">These guys are confused (but at least two are smiling....must be interns)</div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody><tr><td style="text-align: center;"><a href="https://3.bp.blogspot.com/-iM9BLJnGayY/WeioVx5npqI/AAAAAAAAAbg/25nKQNOXU8ghz3CXSnQhFJEOaeT-JZ0AACLcBGAs/s1600/1987%2B2.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="900" data-original-width="1600" height="180" src="https://3.bp.blogspot.com/-iM9BLJnGayY/WeioVx5npqI/AAAAAAAAAbg/25nKQNOXU8ghz3CXSnQhFJEOaeT-JZ0AACLcBGAs/s320/1987%2B2.jpg" width="320" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;"><a href="https://qz.com/1106440/black-monday-1987-the-stock-market-crash-that-was-so-bad-hospital-admissions-spiked/" target="_blank">Quartz</a></td></tr></tbody></table>&nbsp;These guys have resorted to fisticuffs<br /><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody><tr><td style="text-align: center;"><a href="https://4.bp.blogspot.com/-gDkQRH1e_S0/WeioW_2dEvI/AAAAAAAAAbk/Nb4TOVrBO4AUxSumouq1M_NJxYL1Fy7bwCLcBGAs/s1600/1987%2B3.JPG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="401" data-original-width="534" height="240" src="https://4.bp.blogspot.com/-gDkQRH1e_S0/WeioW_2dEvI/AAAAAAAAAbk/Nb4TOVrBO4AUxSumouq1M_NJxYL1Fy7bwCLcBGAs/s320/1987%2B3.JPG" width="320" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;"><a href="https://www.usatoday.com/story/money/2017/10/19/black-monday-can-1987-style-stock-market-crash-happen-again/774989001/" target="_blank">USA Today</a></td></tr></tbody></table>While 22.6% in a day is a very unfortunate event, selling that day would have been the worst thing that you could do.&nbsp; The below chart shows that stock markets, even despite this historically bad day, ultimately recovered.&nbsp; A great example of why you should avoid selling due to fear.<br /><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://4.bp.blogspot.com/-xJXFWGrujeo/WeisQ4AhICI/AAAAAAAAAbw/-aXS9zcTdeoT3D8957_zVvt-Nkb55Z_LACLcBGAs/s1600/1987%2BDJIA.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="529" data-original-width="826" height="204" src="https://4.bp.blogspot.com/-xJXFWGrujeo/WeisQ4AhICI/AAAAAAAAAbw/-aXS9zcTdeoT3D8957_zVvt-Nkb55Z_LACLcBGAs/s320/1987%2BDJIA.PNG" width="320" /></a></div><br />Matt Woebkenberghttp://www.blogger.com/profile/02339985889844055427noreply@blogger.com0tag:blogger.com,1999:blog-3990147989742682810.post-10799145145375615682017-10-11T09:16:00.000-04:002017-10-11T09:16:32.224-04:00Fun FactsI recently scanned the beginning of a <a href="https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf" target="_blank">Treasury Report</a>&nbsp;(h/t <a href="https://www.bloomberg.com/view/articles/2017-10-09/retail-voters-and-insider-traders" target="_blank">Matt Levine</a>) and thought I would share some of the interesting factoids from the report along with brief thoughts.<br /><a name='more'></a><br /><br /><ul><li>U.S. Market Sizes: Equity Market: $29 trillion; U.S. Treasuries: $14 trillion; Corporate Bonds: $8.5 trillion; Interest Rate Derivatives: $200 trillion</li><ul><li>See our post titled: <a href="http://workingtoretirement.blogspot.com/2017/09/the-market-you-cant-see.html" target="_blank">The Market You Can't See</a>; Warren Buffett famously referred to derivatives as "financial weapons of mass destruction".&nbsp; Derivatives were the reason for the severity of the 2008-2009 recession and the catalyst for the bank bailouts.&nbsp; Derivatives are useful financial tools (and have been around almost as long as all other financial instruments), but with the market continuing to swell to enormous levels, the lack of clarity in the market becomes a cause for concern.&nbsp;&nbsp;</li></ul><li>"Over the last 20 years, the number of public companies in the United States has dropped by nearly 50%."</li><ul><li>Simultaneously, the Private Equity markets have exploded.&nbsp; Growth capital is now being raised in private markets rather than public (due in part to the rise in institutional investing vs. individual investing and possibly to the growing income disparity around the world).&nbsp; Companies are only going public nowadays in order to provide liquidity to early investors.&nbsp; This marks a large turning point in markets and could be an indicator of a regime change where past market performance becomes less relevant due to the vastly different makeup of today's public equity markets.</li><li>It is also interesting to consider how much of Private Equity's enormous outperformance over the past 20 years is due to this structural change.&nbsp; The illiquidity premium hardly justifies the impressive recent track record, so it is possible that this structural change is responsible for a portion of outperformance.&nbsp; This would indicate that Private Equity returns would inherently be lower going forward once some unknown "critical mass" is reached in the transformation of public vs. private markets.</li></ul><li>There are 12 equity exchanges and 40 alternative trading systems</li><ul><li>Just an interesting market microstructure note that many investors never consider.&nbsp; When your trade is placed, your broker is responsible for achieving best execution (in most cases) where they direct your trade to the exchange with the best listed price.&nbsp; Every once in a while you will see large lawsuits where brokers were improperly directing trades without properly disclosing it.&nbsp; This is because at any given time, there are many quoted prices for the same stock.</li></ul></ul><div>For future posts I will aim to actually read the article that I reference rather than just "scanning the beginning" of them.&nbsp; We'll work up to that.</div>Matt Woebkenberghttp://www.blogger.com/profile/02339985889844055427noreply@blogger.com0tag:blogger.com,1999:blog-3990147989742682810.post-42580893095067670202017-10-06T14:12:00.002-04:002017-10-06T14:14:10.566-04:00Netflix Price IncreaseAs many of our readers have probably heard, Netflix is raising the monthly price of its streaming service throughout the U.S.&nbsp; While this is unfortunate for the many among us, including me, that have Netflix, it was necessary and perhaps even past due for Netflix the company.&nbsp; Why?&nbsp; Because they can't afford to continue their current business model interminably.<br /><br /><a name='more'></a>Shira Ovide at Bloomberg provides the below convenient chart showing Netflix's free cash flow since Q2 2013 (<a href="https://www.bloomberg.com/gadfly/articles/2017-10-05/netflix-gains-some-sense-and-smartens-up-about-money" target="_blank">here</a>).<br /><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://3.bp.blogspot.com/-48Jj5EusYF0/WdfH3VY8FEI/AAAAAAAAAac/nbQgnHmKPP4FV_xzcygRvfi4g9aZos3JgCLcBGAs/s1600/NFLX%2BFCF.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="332" data-original-width="911" height="145" src="https://3.bp.blogspot.com/-48Jj5EusYF0/WdfH3VY8FEI/AAAAAAAAAac/nbQgnHmKPP4FV_xzcygRvfi4g9aZos3JgCLcBGAs/s400/NFLX%2BFCF.JPG" width="400" /></a></div><br />While this is obviously not sustainable, it is a very typical strategy for a high growth company.&nbsp; Netflix has pursued the growth at all costs mentality that includes plans to spend up to $6 billion on programming in the next year while continuing to subsidize international growth.&nbsp; This has largely been "successful" so far with the stock up almost 1800% over the past 5 years and annual revenue growth of over 20% since 2013.&nbsp; The challenge for these companies comes in determining when to pursue profitability rather than growth.<br /><br />These price increases do not necessarily mean that Netflix is suddenly turning their attention to profitability (they could just use the added revenue for more growth spending), but that will be what investors look for in future earnings announcements.&nbsp; Taking a business from high growth to profitable powerhouse has felled many large companies before, but that will (at some point) become the challenge for companies like Netflix to live up to their lofty valuations.Matt Woebkenberghttp://www.blogger.com/profile/02339985889844055427noreply@blogger.com0tag:blogger.com,1999:blog-3990147989742682810.post-7599609372305581082017-10-02T14:36:00.000-04:002017-10-02T14:36:01.730-04:00Fall 2017 Investor LetterOur <a href="http://www.horancapitaladvisors.com/Portals/horancapitaladvisors/Documents/Commentary/Fall%202017%20Investor%20Letter.pdf" target="_blank">Q3 2017 Investor Letter</a> is now available on our website.&nbsp; From Young Jeezy to Bob Seger, we cover it all (there is even some market-related stuff in there).&nbsp; Check it out, and ask us any questions that you may have.&nbsp; Professionals like this fella below are standing by to answer (matta@horancapitaladvisors.com).<br /><br /><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://2.bp.blogspot.com/-YyFKbtUgQBk/WdKGgv3XPcI/AAAAAAAAAa4/0XIDzhk4Wi4M0LF-S9HSa-NcM4N9MLyegCLcBGAs/s1600/Antenucci.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="200" data-original-width="200" src="https://2.bp.blogspot.com/-YyFKbtUgQBk/WdKGgv3XPcI/AAAAAAAAAa4/0XIDzhk4Wi4M0LF-S9HSa-NcM4N9MLyegCLcBGAs/s1600/Antenucci.jpg" /></a></div><div class="separator" style="clear: both; text-align: center;"><br /></div><div class="separator" style="clear: both; text-align: left;"><a href="http://www.horancapitaladvisors.com/Portals/horancapitaladvisors/Documents/Commentary/Fall%202017%20Investor%20Letter.pdf" target="_blank">HORAN Capital Advisors Fall 2017 Investor Letter</a></div>Matt Woebkenberghttp://www.blogger.com/profile/02339985889844055427noreply@blogger.com0tag:blogger.com,1999:blog-3990147989742682810.post-6053457420657067412017-09-28T14:13:00.003-04:002017-09-28T15:07:31.908-04:00Cincinnati's Strong EconomyAccording to the <a href="https://www.bea.gov/newsreleases/regional/gdp_metro/2017/pdf/gdp_metro0917.pdf" target="_blank">Bureau of Economic Analysis</a>, Cincinnati has become the largest metropolitan economy in Ohio based on 2016 data (<a href="https://www-bizjournals-com.cdn.ampproject.org/c/s/www.bizjournals.com/cincinnati/news/2017/09/27/cincinnati-stakes-claim-as-ohio-s-largest-economy.amp.html" target="_blank">Cincinnati Business Courier</a>).&nbsp; This moves Cincinnati up to the 28th largest metropolitan economy in the U.S. with Cleveland and Columbus close behind at 29 and 30 respectively.&nbsp; Cincinnati's economy also had an above average growth rate of 4.3% (2.5% after considering inflation).&nbsp; This comes after previous years of 0.5% and 0.3% growth for the region in 2014 and 2015.<br /><br /><a name='more'></a><br /><br />The biggest contributor to growth in the region was Nondurable goods manufacturing which was responsible for .80% of the real 2.5% growth.&nbsp; Durable goods manufacturing, meanwhile detracted by 15 basis points.<br /><br />Overall, Cincinnati's economy grew at a healthy rate in 2016 and currently holds the top spot in the ongoing GDP competition with Cleveland and Columbus.Matt Woebkenberghttp://www.blogger.com/profile/02339985889844055427noreply@blogger.com0tag:blogger.com,1999:blog-3990147989742682810.post-74883845696204178122017-09-27T14:26:00.000-04:002017-09-27T14:26:20.124-04:00Money ExcusesFound a good article on "excuses" that we all make when it comes to money (<a href="http://www.humbledollar.com/2017/09/excuses/" target="_blank">HumbleDollar</a>).&nbsp; Highly recommend that the readers take a look.&nbsp; My favorite quote:<br /><em style="background-color: white; color: #222222; font-family: proxima-nova, adobe-garamond-pro, sans-serif; font-size: 17.5px;"><br /></em><em style="background-color: white; color: #222222; font-family: proxima-nova, adobe-garamond-pro, sans-serif; font-size: 17.5px;">“It’s okay to spend money if it cheers me up.”</em><span style="background-color: white; color: #222222; font-family: , , sans-serif; font-size: 17.5px;">&nbsp;This is the crack cocaine school of budgeting."</span><br /><span style="background-color: white; color: #222222; font-family: , , sans-serif; font-size: 17.5px;"><br /></span><br /><span style="background-color: white;"><span style="font-family: inherit;"><br /></span></span><span style="background-color: white;"><span style="font-family: inherit;"><br /></span></span>Matt Woebkenberghttp://www.blogger.com/profile/02339985889844055427noreply@blogger.com0tag:blogger.com,1999:blog-3990147989742682810.post-76920856301859486022017-09-26T09:00:00.000-04:002017-09-26T09:00:00.179-04:00The Market You Can't SeeAs of November 2015, the market cap of all of the stock exchanges in North America combined was about <a href="http://www.visualcapitalist.com/all-of-the-worlds-stock-exchanges-by-size/" target="_blank">$28 trillion</a>. &nbsp;That is a lot of money...but it is also easily visible/analyzable. &nbsp;The benefit of this is that financial market participants can fairly easily quantify what happens if the stock market falls by half --&gt; companies that hold stocks will lose roughly half of those stocks' value on their balance sheets. &nbsp;This isn't ideal, but it doesn't really cause any major issues (aside from the whole stock market getting cut in half thing). &nbsp;<a href="http://workingtoretirement.blogspot.com/2017/04/friday-financial-terms-derivatives.html" target="_blank">Derivatives</a>, on the other hand, are notoriously difficult to analyze, and make up their own enormous market.<br /><br /><a name='more'></a>A recent Bloomberg <a href="https://www.bloomberg.com/news/articles/2017-09-25/boe-seeks-brexit-deal-to-protect-existing-derivative-contracts" target="_blank">article</a>&nbsp;discussed the need for the U.K. and Europe to address the "long-term validity" of over $27 trillion worth of existing derivative contracts. &nbsp;This $27 trillion is but a small sliver of the derivatives market, but it is impossible to accurately determine any one company's risk exposure based on derivative holdings. &nbsp;This became a key issue in the financial crisis when the failure of one key derivatives counter party all but destroyed the entire system. &nbsp;While lay investors watch the stock exchanges and bond prices, often the real significant money is being made/lost in the derivatives markets. &nbsp;Unfortunately, these markets do not provide the same transparency (often for good reason...it isn't really possible) as public markets. &nbsp;This means that we often all live in blissful ignorance of the market that we can't see.Matt Woebkenberghttp://www.blogger.com/profile/02339985889844055427noreply@blogger.com0tag:blogger.com,1999:blog-3990147989742682810.post-61656445831620255082017-09-25T13:08:00.002-04:002017-09-25T13:08:28.633-04:00Stock Picking is HardThere was recently an <a href="https://www.nytimes.com/2017/09/22/business/apple-investment.html?mtrref=ritholtz.com&amp;gwh=96A552372C3525077715A05C21CECFE0&amp;gwt=pay" target="_blank">article</a> in the New York Times (that Barry Ritholtz summarizes <a href="http://ritholtz.com/2017/09/analysis-stocks-arent-good-investments/" target="_blank">here</a>) that identified the challenge with picking stocks. &nbsp;The issue with stock picking is that a few excellent performers tend to provide almost all of the return of the market over time. &nbsp;According to the article, "4 percent of all publicly traded stocks account for all of the net wealth earned by investors in the stock market since 1926." &nbsp;Of those, "a mere 30 stocks account for 30 percent of the net wealth generated."<div><br /></div><div>So, if you missed out on these top 4% of stocks, then you did not outperform 1-month Treasury bills over that time frame. &nbsp;This is why diversification is so important. &nbsp;With a diversified stock portfolio, you will perform as well as the top stocks, but you will perform significantly better than the bottom stocks. &nbsp;With so few "good" stocks to choose from, it is often best to stay diversified rather than risk dramatic underperformance (especially when you cannot afford underperformance).</div><div><br /></div>Matt Woebkenberghttp://www.blogger.com/profile/02339985889844055427noreply@blogger.com0tag:blogger.com,1999:blog-3990147989742682810.post-57470602216051345672017-09-20T11:07:00.000-04:002017-09-20T11:07:10.637-04:00Market Update: U.S.Here is a brief update on what is going on in U.S. markets.<br /><br /><a name='more'></a>They are expensive - the below chart shows the forward Price to Earnings ratio for the S&amp;P 500. &nbsp;Basically, investors are currently paying more than they typically do for each dollar of earnings.<br /><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://1.bp.blogspot.com/-gaDmlDLgwZo/WcJ_SWhtczI/AAAAAAAAAaM/j0KSz5EKnmoW36O-B4Coj06F544ZBqErwCLcBGAs/s1600/SP500%2BPE%2B2017%2B09%2B20.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="381" data-original-width="504" src="https://1.bp.blogspot.com/-gaDmlDLgwZo/WcJ_SWhtczI/AAAAAAAAAaM/j0KSz5EKnmoW36O-B4Coj06F544ZBqErwCLcBGAs/s1600/SP500%2BPE%2B2017%2B09%2B20.png" /></a></div><br />But....<br /><br />Analysts expect earnings to grow 11.5% in calendar year 2017 and another 10.9% in calendar year 2018. &nbsp;Double digit earnings growth would obviously make a significant difference in the denominator (earnings) of the market's P/E ratio. <br /><br />Additionally, long term interest rates in the U.S. remain exceptionally low with the yield on the 10 Year U.S. Treasury hovering just above 2 percent as shown by the chart below.<br /><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://3.bp.blogspot.com/-FOSZPPKJVi0/WcKCq5JmhBI/AAAAAAAAAag/G-moG81ZQZAJOUs6uelhjpMfesy9HvTXgCLcBGAs/s1600/US%2B10Yr%2B2017%2B09%2B20.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="393" data-original-width="522" src="https://3.bp.blogspot.com/-FOSZPPKJVi0/WcKCq5JmhBI/AAAAAAAAAag/G-moG81ZQZAJOUs6uelhjpMfesy9HvTXgCLcBGAs/s1600/US%2B10Yr%2B2017%2B09%2B20.png" /></a></div><br />Low long term interest rates are beneficial for stock prices because they make future cash flows more valuable today (Effectively stocks should rise as interest rates decrease in order to maintain a sort of equilibrium between stock and bond prices).<br /><br />The low long term interest rates may, however, be affected by today's Fed meeting where they will likely discuss their strategy for unwinding their balance sheet (they bought a bunch of assets in order to help the economy in what is known as Quantitative Easing after the financial crisis...they now need to decide how to get rid of these assets so that they are holding a more "normal" amount for a central bank of their size).<br /><br />As always feel free to contact anyone in HCA with any questions.Matt Woebkenberghttp://www.blogger.com/profile/02339985889844055427noreply@blogger.com0tag:blogger.com,1999:blog-3990147989742682810.post-70427938537917956182017-09-15T11:00:00.000-04:002017-09-15T11:00:02.876-04:00Understanding the MarketplaceHere is a quote by Howard Marks (taken from a post by <a href="http://theirrelevantinvestor.com/2017/05/06/my-friend-is-beating-me/" target="_blank">Michael Batnick</a>):<br /><br /><div style="background-color: white; box-sizing: border-box; color: #4c4d50; font-family: &quot;Droid Serif&quot;, Georgia, serif; font-size: 18px; font-style: italic;">"First-level thinking says, “It’s a good company, let’s buy the stock.” Second-level thinking says, “It’s a good company, but everyone thinks it’s a great company, and it’s not. So the stock’s overrated and overpriced; Let’s sell.”</div><div style="background-color: white; box-sizing: border-box; color: #4c4d50; font-family: &quot;Droid Serif&quot;, Georgia, serif; font-size: 18px; font-style: italic; margin-top: 1em;">First-level thinkers see what’s on the surface, react to it simplistically, and buy or sell on the basis of their reactions. They don’t understand their setting as a marketplace where asset prices reflect and depend on the expectation of the participants. They ignore part that others play in how prices change. And they fail to understand the implications of all this for the route to success."</div><div style="background-color: white; box-sizing: border-box; margin-top: 1em;"><span style="font-family: inherit;"></span></div><a name='more'></a><span style="font-family: inherit;">The whole quote is interesting, but the part I want to focus on is that investors constantly forget "their setting as a marketplace." &nbsp;For all of the time that professional investors spend calculating a "fair value" for a given company, a stock is truly only worth what someone will pay you for it. &nbsp;It is a marketplace where individuals interact to buy and sell. &nbsp;Stocks do not always behave rationally and certainly do not always do what we expect, but that is because they are controlled by the decisions of people. &nbsp;Investor sentiment drives markets in the short term, fundamentals drive it in the long term.&nbsp;</span>Matt Woebkenberghttp://www.blogger.com/profile/02339985889844055427noreply@blogger.com0tag:blogger.com,1999:blog-3990147989742682810.post-77020201516391763582017-09-14T11:00:00.000-04:002017-09-14T11:00:44.347-04:00The Piggly-Wiggly CornerAfter Tulipomania made an appearance in popular business news (see yesterday's post), I thought I would share another famous/interesting finance story: the Piggly-Wiggly Corner.<br /><br /><a name='more'></a><br /><br />Clarence Saunders founded the modern grocery store when he opened the first Piggly Wiggly store in 1916. &nbsp;The store was so successful that many more were opened, and the company ended up being listed on the New York Stock Exchange. <br /><br />After some issues at a few stores, a group of large investors decided to aggressively short Piggly Wiggly stock with the goal of driving the price down and realizing a profit on their short positions. &nbsp;Clarence was having none of it.<br /><br />Clarence Saunders raised ten million dollars from a group of banks and used much of his own personal wealth to buy Piggly Wiggly stock in the market. &nbsp;His plan was to buy so much of the stock, that the shorts would have to come crawling back to him in order to buy the stock to close out their short positions.<br /><br />[You enter into a short position by selling stock that you do not have. &nbsp;You close the short position by buying this stock back and delivering it to the lender of the share you sold. &nbsp;Thus, if the price of the stock goes down after you sell, you can buy back at a lower price, and you have made a profit. &nbsp;You lose money if the reverse happens]<br /><br />And...Clarence's plan worked. <br /><br />At one point, Clarence had orders for 196,000 of the 200,000 shares outstanding (<a href="https://en.wikipedia.org/wiki/Clarence_Saunders_(grocer)#cite_ref-2" target="_blank">Wikipedia</a>). &nbsp;He basically just bought (almost) all of the shares that existed. &nbsp;So, the New York Stock Exchange declared that a corner existed in Piggly Wiggly stock, and Clarence demanded delivery of the borrowed shares. &nbsp;By rule, the short sellers then had one day to purchase the shares and deliver them to the lender. &nbsp;So, they would effectively have to buy from Clarence Saunders in order to close out their positions because he owned (almost) all of the shares. &nbsp;Thus, Saunders could demand whatever price he wanted and they would have to pay it.<br /><br />But....the New York Stock Exchange changed the rules. &nbsp;They decided to give the shorts 5 days to deliver the shares rather than the traditional 24 hours. &nbsp;With this extra time, the shorts were able to find shares owned by people other than Clarence Saunders and buy those shares at elevated prices (though still much lower than what Saunders would have demanded) to close out their positions.<br /><br />So...Clarence Saunders went bankrupt and all of the shorts lost a bunch of money too. &nbsp;Clarence Saunders took on Wall Street and everyone lost.Matt Woebkenberghttp://www.blogger.com/profile/02339985889844055427noreply@blogger.com0tag:blogger.com,1999:blog-3990147989742682810.post-71374501207441029642017-09-13T14:39:00.004-04:002017-09-13T14:39:57.283-04:00Bitcoin/TulipomaniaJamie Dimon, the CEO of banking behemoth JP Morgan, recently shared some harsh words about Bitcoin. <br /><br /><a name='more'></a><br />He said, <span style="background-color: white; font-family: inherit;">"I’m going to be really clear in this one. Forget the blockchain, that’s a technology… But… the currency isn’t going to work. You can’t have a business where people can invent a currency out of thin air and think the people buying it are really smart. It’s worse than tulip bulbs, OK?" (<a href="https://ftalphaville.ft.com/2017/09/12/2193624/money-creator-is-getting-really-annoyed-by-wannabe-competitor/" target="_blank">Financial Times</a>)</span><br /><span style="background-color: white; font-family: inherit;"><br /></span><span style="background-color: white;">His comments were great for two reasons: 1. Our readers now understand his tulip bulbs comment because we recently wrote a post about <a href="http://workingtoretirement.blogspot.com/2017/05/tulipomania.html" target="_blank">Tulipomania</a>, and 2. Despite not believing in the currency, he followed up with,</span><br /><span style="background-color: white;"><br /></span><span style="background-color: white;">"</span><span style="background-color: #fff1e0; color: #505050; font-family: Georgia, serif; font-size: 18px;">don’t ask me to short it, it could be at 20,000 before this happens, but it’ll eventually blow up.</span><span style="font-family: inherit;"><span style="background-color: white;">"</span></span><br /><span style="font-family: inherit;"><span style="background-color: white;"><br /></span></span><span style="font-family: inherit;"><span style="background-color: white;">(Shorting means to bet against Bitcoin - bet that it goes down in price)</span></span><br /><span style="font-family: inherit;"><span style="background-color: white;"><br /></span></span><span style="font-family: inherit;"><span style="background-color: white;">This is a great point about investing (and specifically shorting) and applies to all securities. &nbsp;Dimon is confident in his overall thesis, but has no estimate of the timing. &nbsp;This means that he cannot short Bitcoin because it may bankrupt him in the process if it continues to rise before its fall.</span></span><br /><span style="font-family: inherit;"><span style="background-color: white;"><br /></span></span><span style="font-family: inherit;"><span style="background-color: white;">This an issue that long-only buy and hold investors do not have to worry about. &nbsp;When you buy a stock, your maximum loss is 100%, but when you short a stock, your losses could theoretically be infinite (A great example was our February post about the unfortunate story of <a href="http://workingtoretirement.blogspot.com/2017/02/timing-is-everythingbut-dont-try-it.html" target="_blank">Joe Campbell</a>).</span></span><br /><span style="font-family: inherit;"><span style="background-color: white;"><br /></span></span><span style="font-family: inherit;"><span style="background-color: white;">But, as an overarching theme, this demonstrates the two crucial components of a successful investment: &nbsp;a correct thesis, and correct timing. &nbsp;One without the other is not sufficient.</span></span>Matt Woebkenberghttp://www.blogger.com/profile/02339985889844055427noreply@blogger.com0tag:blogger.com,1999:blog-3990147989742682810.post-10223926366033268542017-09-08T15:10:00.000-04:002017-09-08T15:10:15.891-04:00Equifax HackBy now, everyone has heard of the hack at Equifax Inc. that has exposed personal information for over 140 million consumers, so I thought I would show our readers what that does to a stock.<br /><br /><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody><tr><td style="text-align: center;"><a href="https://3.bp.blogspot.com/-IJEni18LLVs/WbLqTJp1XrI/AAAAAAAAAZ0/EP7etu0fN4AGEQjq4M7kVVJcYqS_148CACLcBGAs/s1600/EFX.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="542" data-original-width="1059" height="203" src="https://3.bp.blogspot.com/-IJEni18LLVs/WbLqTJp1XrI/AAAAAAAAAZ0/EP7etu0fN4AGEQjq4M7kVVJcYqS_148CACLcBGAs/s400/EFX.PNG" width="400" /></a></td></tr><tr><td class="tr-caption" style="text-align: center;">Click to Enlarge</td></tr></tbody></table><br /><div>The stock falls 13% on astronomically high trading volume. &nbsp;Far right of the above chart is very ugly. &nbsp;</div><div>Moral of the story - don't get hacked...and if you must get hacked, don't be a $17 billion company that has the personal information of almost every American adult.</div>Matt Woebkenberghttp://www.blogger.com/profile/02339985889844055427noreply@blogger.com0tag:blogger.com,1999:blog-3990147989742682810.post-23621242367024119222017-09-07T11:00:00.000-04:002017-09-07T11:33:55.729-04:00Importance of DiversificationWe talk a lot here about why diversification is important, but sometimes a picture is worth a thousand words. &nbsp;So, here come 1,000 words because I can't find a good picture.<br /><br />Just kidding.<br /><br />Here is a picture. (click to enlarge)<br /><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://3.bp.blogspot.com/-NxfqXTJVKTI/WbE0G6P10lI/AAAAAAAAAZc/QwdyTT_Zra0gwqaO5TKE5kIonzplu5uSACLcBGAs/s1600/BlackRock%2BAsset%2BClass%2BPerformance.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="430" data-original-width="968" height="176" src="https://3.bp.blogspot.com/-NxfqXTJVKTI/WbE0G6P10lI/AAAAAAAAAZc/QwdyTT_Zra0gwqaO5TKE5kIonzplu5uSACLcBGAs/s400/BlackRock%2BAsset%2BClass%2BPerformance.PNG" width="400" /></a></div><br />While the highest performing asset class is constantly changing, the diversified portfolio (orange box) consistently hovers near the middle of the pack. &nbsp;This consistent performance, and more importantly the avoidance of large drawdowns, is very important for taking advantage of compound interest over the long term.Matt Woebkenberghttp://www.blogger.com/profile/02339985889844055427noreply@blogger.com0tag:blogger.com,1999:blog-3990147989742682810.post-25798927717361751322017-09-06T13:51:00.000-04:002017-09-06T13:51:22.122-04:00Saving Rate vs. Investment ReturnsIn our recent post on lifestyle and controlling expenses (<a href="http://workingtoretirement.blogspot.com/2017/08/advice-from-24-year-old-lifestyle.html" target="_blank">here</a>), I commented that "<span style="background-color: white;"><span style="font-family: inherit;">Investment returns are mostly determined by the broader market over which neither you nor your financial advisor have much control and your time horizon is determined by aging and dying...which just kind of happen. &nbsp;Lifestyle creep (living more extravagantly with each pay increase) is incredibly difficult to avoid, but by simply controlling it through things like systematic increases to 401k contributions, we can make a big difference in our path to retirement." &nbsp;I have decided to reiterate that here because: 1. copying and pasting was super easy, and 2. I just came across a new article that made the same point in a far more eloquent manner.</span></span><br /><br /><a name='more'></a>The new article comes from Brendan Mullooly and is titled "<a href="https://mullooly.net/the-heavy-lifting/11550" target="_blank">The Heavy Lifting</a>". &nbsp;Brendan makes a great comparison between canoeing and saving/investing. &nbsp;Brendan talks about how in canoeing, he often wanted to attribute their speed to his paddling, when in reality, the speed of the river largely determined the speed of the canoe. &nbsp;The paddling kept the canoe on track, but the running river determined the speed. &nbsp;He then equates the running river to your savings rate, and the paddling to your investments. &nbsp;Your investments keep you on track, but without a good savings rate, you will not get to the finish line on time.<br /><br />I highly encourage our readers to check out his <a href="https://mullooly.net/the-heavy-lifting/11550" target="_blank">article</a>. &nbsp;It is a quick read with some very helpful information.Matt Woebkenberghttp://www.blogger.com/profile/02339985889844055427noreply@blogger.com0tag:blogger.com,1999:blog-3990147989742682810.post-58694178922472975832017-09-05T11:53:00.001-04:002017-09-05T11:53:09.890-04:00August Market Review<div class="MsoNormal">US stocks posted a mild gain as measured by the S&amp;P 500 in August. The S&amp;P 500 broke its streak of 58 consecutive trading days without a 1% down move and 77 trading days without a 1% up move despite a month of limited trading activity. A few themes dominated financial news headlines: North Korea, Hurricane Harvey, and the US debt ceiling. The North Korea missile launch (the first over Japan since 2009) initially shook equity markets as US futures traded lower and safe haven assets such as gold rallied after the launch. However, investors “bought the dip” and stocks rebounded as the missile launch did not overshadow the improving global growth backdrop.&nbsp;</div><div class="MsoNormal"><br /></div><div class="MsoNormal"><b>Government Shutdown</b></div><div class="MsoNormal">Much has been made of the potential government shutdown in Washington. The US government will hit its debt ceiling at the end of September and without the House and Senate passing a new spending bill, the government would potentially shut down until a new spending agreement is reached. The prospect of a government shutdown is alarming on its surface, but this historically has not meant much for stocks. Typically, government shutdowns do not last very long and are viewed as a non-event in the eyes of investors. See past government shutdowns and market reactions in the table below, per LPL Financial.<o:p></o:p></div><div class="MsoNormal"><br /></div><div class="MsoNormal"><!--[if gte vml 1]><v:shapetype id="_x0000_t75" coordsize="21600,21600" o:spt="75" o:preferrelative="t" path="m@4@5l@4@11@9@11@9@5xe" filled="f" stroked="f"> <v:stroke joinstyle="miter"/> <v:formulas> <v:f eqn="if lineDrawn pixelLineWidth 0"/> <v:f eqn="sum @0 1 0"/> <v:f eqn="sum 0 0 @1"/> <v:f eqn="prod @2 1 2"/> <v:f eqn="prod @3 21600 pixelWidth"/> <v:f eqn="prod @3 21600 pixelHeight"/> <v:f eqn="sum @0 0 1"/> <v:f eqn="prod @6 1 2"/> <v:f eqn="prod @7 21600 pixelWidth"/> <v:f eqn="sum @8 21600 0"/> <v:f eqn="prod @7 21600 pixelHeight"/> <v:f eqn="sum @10 21600 0"/> </v:formulas> <v:path o:extrusionok="f" gradientshapeok="t" o:connecttype="rect"/> <o:lock v:ext="edit" aspectratio="t"/></v:shapetype><v:shape id="Picture_x0020_3" o:spid="_x0000_i1025" type="#_x0000_t75" alt="https://lpl-research.com/hoc/images/082417_mmm_figure1.png?crc=13645181" style='width:332.25pt;height:276pt;visibility:visible;mso-wrap-style:square'> <v:imagedata src="file:///Y:\Users\mantenucci\AppData\Local\Temp\1\msohtmlclip1\01\clip_image001.png" o:title="082417_mmm_figure1"/></v:shape><![endif]--><!--[if !vml]--><!--[endif]--><o:p></o:p></div><div class="separator" style="clear: both; text-align: center;"><a href="https://2.bp.blogspot.com/-bx164gdvWYk/Wa2NLa4uUEI/AAAAAAAAAZM/CMwCj64oAY83FnhI5KZNjZpR_M2XulIjwCLcBGAs/s1600/Shutdown.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="368" data-original-width="443" src="https://2.bp.blogspot.com/-bx164gdvWYk/Wa2NLa4uUEI/AAAAAAAAAZM/CMwCj64oAY83FnhI5KZNjZpR_M2XulIjwCLcBGAs/s1600/Shutdown.png" /></a></div><div class="MsoNormal"><o:p><br /></o:p></div><div class="MsoNormal"><b>Hard Data Follow-Through?</b></div><div class="MsoNormal">One topic of debate since last year’s Presidential Election was whether strong sentiment (soft) data would translate into real (hard) economic growth. Small Business Optimism, Consumer Sentiment, and Manufacturing Surveys (all considered soft data) have shown strong readings while true economic growth as measured by GDP had been lackluster, especially in the first quarter. The most recent revision to 2<sup>nd</sup> quarter GDP came in at +3.0%, annualized, a very strong revision and fastest quarterly growth rate since Q1 2015. Although more data is needed to confirm a higher growth rate for the economy, a bounce back from a weak first quarter is welcome. See chart of GDP growth below.<o:p></o:p></div><div class="MsoNormal"><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://3.bp.blogspot.com/-7HjD1LuX1bY/Wa6z70AavnI/AAAAAAAAAZo/vZsbIJStzNsoZmtS5T_Nst4k2kWQro1_ACLcBGAs/s1600/US%2BGDP%2BGrowth.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="676" data-original-width="903" height="299" src="https://3.bp.blogspot.com/-7HjD1LuX1bY/Wa6z70AavnI/AAAAAAAAAZo/vZsbIJStzNsoZmtS5T_Nst4k2kWQro1_ACLcBGAs/s400/US%2BGDP%2BGrowth.JPG" width="400" /></a></div><br /></div><div class="MsoNormal"><b>Going Forward</b><o:p></o:p></div><div class="MsoNormal">Investors will be watching a number of events in September. Perhaps the most important topic of the year will be the Fed’s decision on reducing the size of their balance sheet. Markets will get key information on the topic after the upcoming FOMC meeting September 20th. Additionally, investors are looking to assess the economic impact Hurricane Harvey may have on US growth. Houston is the 4<sup>th</sup>largest US metropolitan area in terms of contribution to US GDP.&nbsp;</div><div class="MsoNormal"><o:p></o:p></div>Matt Antenuccihttp://www.blogger.com/profile/11207579845341063953noreply@blogger.com0tag:blogger.com,1999:blog-3990147989742682810.post-1466867064800134432017-08-31T10:31:00.000-04:002017-08-31T10:31:21.185-04:00Optimism vs. Pessimism: Check-InAbout 6 months ago we wrote what I still view as the best posts on this blog in the form of our Optimism vs. Pessimism series. &nbsp;After writing the pessimism posts first, we had several people mention to us that things looked pretty ugly and they were just about ready to sell. &nbsp;Well, I hope the subsequent week of optimistic posts changed your mind, because the S&amp;P 500 Total Return is up another 4.8% since the posts were written.<br /><br /><a name='more'></a>One of the other fascinating things is that since the posts were written, almost nothing has changed. <br /><br />In the Pessimist Posts, we pointed out:<br /><br /><ol><li>Millennials are not participating in employment market, making less money when they do work, and have too much debt to be entrepreneurial (<a href="http://workingtoretirement.blogspot.com/2017/02/a-pessimists-perspective-part-1.html" target="_blank">Pessimist 1</a>)</li><li>Costs are rising dramatically for things like healthcare and education and there is not always a corresponding increase in quality of service (<a href="http://workingtoretirement.blogspot.com/2017/02/a-pessimists-perspective-part-2.html" target="_blank">Pessimist 2</a>)</li><ol><li>Another significant point in this debate (as mentioned in the<a href="http://slatestarcodex.com/2017/02/09/considerations-on-cost-disease/" target="_blank"> article</a> and in "<a href="https://www.amazon.com/Average-Over-Powering-America-Stagnation/dp/0142181110" target="_blank">Average is Over</a>" by Tyler Cowen) is that costs are rising without any availability of a low cost option. &nbsp;Would you prefer the university education offered 50 years ago at the inflation-adjusted price of that education at that time? &nbsp;Would you at least prefer to have that option?</li></ol><li>The European Union is at a potential turning point (<a href="http://workingtoretirement.blogspot.com/2017/02/a-pessimists-perspective-part-3.html" target="_blank">Pessimist 3</a>)</li><li>All investable assets are expensive (<a href="http://workingtoretirement.blogspot.com/2017/02/a-pessimists-perspective-part-4.html" target="_blank">Pessimist 4</a>)</li><li>China is transitioning to consumption-based economy, we have an entitlement crisis in the U.S., protectionist policies could harm global trade (<a href="http://workingtoretirement.blogspot.com/2017/02/a-pessimists-perspective-part-5.html" target="_blank">Pessimist 5</a>)</li></ol><div>Which of these have been resolved? &nbsp;Almost none of them. &nbsp;The EU may be on slightly firmer footing, but that could be derailed quickly. &nbsp;Protectionist policies are proving difficult to establish, but there is still some clear demand for them. &nbsp;Other than that, nothing has changed. &nbsp;Stocks are still going up.</div><div><br /></div><div>Thing look similar for our Optimist Posts:</div><div><ol><li>The consumer looks reasonably healthy and optimistic (<a href="http://workingtoretirement.blogspot.com/2017/02/optimists-outlook-part-1.html" target="_blank">Optimist 1</a>)</li><li>Millennials stand to inherit a lot of money and are more engaged in investing (<a href="http://workingtoretirement.blogspot.com/2017/02/optimists-outlook-part-2.html" target="_blank">Optimist 2</a>)</li><ol><li>this one may only be reason for optimism if you are a millennial...</li></ol><li>Markets have performed well over the long-term despite consistent challenges (<a href="http://workingtoretirement.blogspot.com/2017/03/optimists-outlook-part-3.html" target="_blank">Optimist 3</a>)</li><li>Equity valuations look more reasonable in the context of the low interest rate environment (<a href="http://workingtoretirement.blogspot.com/2017/03/optimists-outlook-part-4.html" target="_blank">Optimist 4</a>)</li><li>Globally the Middle Class is strengthening and extreme poverty is disappearing (<a href="http://workingtoretirement.blogspot.com/2017/03/optimists-outlook-part-5.html" target="_blank">Optimist 5</a>)</li></ol><div>There are two sides to every coin in investing and not all news is important. &nbsp;The major themes do not change often. &nbsp;Take note when they do, but block out the noise in between. &nbsp;As Paul Samuelson said, "Investing should be more like watching paint dry or watching grass grow. &nbsp;If you want excitement, take $800 and go to Las Vegas."</div></div>Matt Woebkenberghttp://www.blogger.com/profile/02339985889844055427noreply@blogger.com0tag:blogger.com,1999:blog-3990147989742682810.post-33454278161678114342017-08-30T11:00:00.000-04:002017-08-30T11:00:17.900-04:00What's in a NameHere is a 5 year chart of First Bitcoin Capital Corp (BITCF):<br /><br /><div class="separator" style="clear: both; text-align: center;"><a href="https://1.bp.blogspot.com/-84nrv1KWYOQ/WaRnORqXqvI/AAAAAAAAAZE/sI9l8ah2ZHgpk4rfx82W0b_uFY3_2sf5wCLcBGAs/s1600/BITCF.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="464" data-original-width="938" height="197" src="https://1.bp.blogspot.com/-84nrv1KWYOQ/WaRnORqXqvI/AAAAAAAAAZE/sI9l8ah2ZHgpk4rfx82W0b_uFY3_2sf5wCLcBGAs/s400/BITCF.PNG" width="400" /></a></div><div class="separator" style="clear: both; text-align: center;"></div><a name='more'></a><br /><br /><div class="separator" style="clear: both; text-align: left;">It did nothing for over four years, and then has gone on an enormous run this year. &nbsp;Why? &nbsp;Has their performance taken off with the rise in price of Bitcoin? &nbsp;</div><div class="separator" style="clear: both; text-align: left;"><br /></div><div class="separator" style="clear: both; text-align: left;">Yup.</div><div class="separator" style="clear: both; text-align: left;"><br /></div><div class="separator" style="clear: both; text-align: left;">But not because they actually own any bitcoin...just because they have it in their name.</div><div class="separator" style="clear: both; text-align: left;"><br /></div><div class="separator" style="clear: both; text-align: left;">Matt Levine at Bloomberg wrote about the stock the other day (<a href="https://www.bloomberg.com/view/articles/2017-08-25/insider-trading-bitcoin-and-libor" target="_blank">here</a>) because prior to 2014, the company was known as Grand Pacaraima Gold Corp. &nbsp;At that time, the company was an unsuccessful gold miner, but they decided to hitch their wagon to the cryptocurrency movement instead. &nbsp;Business-wise, this change of strategy does not appear to have been very effective as the company lost $9,660 on zero dollars of revenue in Q3 2016, but the stock does not seem to mind. &nbsp;As Matt Levine put it, "<span style="font-family: inherit;">here in 2017, not finding bitcoins is a vastly more lucrative business than not finding gold, and First Bitcoin's stock has soared,&nbsp;trading up from&nbsp;$0.029 per share at the end of 2016 to a high of $2.70 last week. It closed on Wednesday at $1.79 per share, representing a $540 million market capitalization and about 6,000 percent growth year-to-date."</span></div><div class="separator" style="clear: both; text-align: left;"><span style="font-family: inherit;"><br /></span></div><div class="separator" style="clear: both; text-align: left;"><span style="font-family: inherit;">As we explained in our June post "<a href="http://workingtoretirement.blogspot.com/2017/06/know-what-you-are-buying.html" target="_blank">Know What You Are Buying</a>," there is a far easier way to bet on Bitcoin than buying a poorly constructed investment vehicle...just buy Bitcoin.</span></div>Matt Woebkenberghttp://www.blogger.com/profile/02339985889844055427noreply@blogger.com0